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Tax cheats rejoice as Trump's inaugural budget calls for continued IRS funding cuts

Let me make this very clear from the get-go. I never, ever, ever recommend that anyone cheat on his or her taxes.

But if you're inclined to be a bit aggressive with your Form 1040 strategies, your odds of catching a tax examiner's eye are decreasing.

Audit stamp on 1040

The Internal Revenue Service's audit rate has been dropping for years and that trend likely will continue, due in part to more agency funding cuts in the latest federal budget proposal.

Fewer audits yet again: Recently released IRS data shows that in 2016 the number of individual audits dropped for the fifth straight year.

Percentage-wise, audits were down in 2016 by 16 percent from the year before. The agency's overall audit rate fell to 0.7 percent, which translates into the IRS taking a closer look at one out of every 143 returns.

As for raw numbers, the IRS last year conducted just more than a million examinations, which is what the agency prefers to call its reviews of taxpayer filings.

That was 190,162 fewer exams than in 2015 and the fewest number since 2004.

And the IRS was economically evenhanded in its falling audits. Filers at every income level faced fewer exams.

But even though the chance of an audit was down for millionaires — a 5.83 percent chance last year, down from 9.55 percent in 2015 — those with seven-figure incomes still face higher audit odds than do all of us poorer taxpayers.

Another round of budget cuts: Full-fledged face-to-face audits are labor intensive. But labor is something that's been in short supply at the IRS.

Uncle Sam's tax collection and enforcement agency has lost more than 17,000 employees, including nearly 7,000 enforcement agents, since 2010. A key reason folks are leaving, both voluntarily and due to terminations, is the IRS' shrinking budget.

The Trump Administration is continuing that lower-funding trend.

The new president's budget proposal for fiscal year 2018 (which starts Oct. 1) would cut the budget for the Treasury Department, under which the IRS operates, by 4.4 percent. Donald Trump also seeks an unspecified reduction in Treasury's workforce.

As for the IRS specifically, Trump's inaugural budget released today (March 16) says it:

Preserves key operations of the Internal Revenue Service (IRS) to ensure that the IRS could continue to combat identity theft, prevent fraud, and reduce the deficit through the effective enforcement and administration of tax laws. Diverting resources from antiquated operations that are still reliant on paper-based review in the era of electronic tax filing would achieve significant savings, a funding reduction of $239 million from the 2017 annualized CR [continuing resolution under which the federal government is operating through April 28] level.

So once again the IRS is being asked to do more with less.

Contrary to Treasury chief wishes: Not only has that no doubt upset the agency, it's also at odds with what Trump's Treasury Secretary, Steven Mnuchin, has said the IRS needs.

Mnuchin, during his Senate confirmation hearings, told lawmakers -- who since the Tea Party tax exempt organization targeting scandal broke in 2013 have been pummeling the IRS with both fiscal and political bludgeons -- that the tax agency needs more money and a larger staff.

It doesn't look like that Mnuchin will get his wish.

So expect audits to drop yet again if Trump's budget request holds.

And look for the IRS to rely even more on correspondence audits.

Mail order audits: These mailed inquiries to taxpayers about questionable filings typically dominate IRS audits.

2016 was no different. Last year, more than 76 percent of the IRS' slightly more than a million audits were done by correspondence.

Here, paper letters are snail mailed to taxpayers focusing on one or two issues in their returns. The taxpayers respond, either by paying any additional tax, penalties and interest that the IRS says is due based on agency examination of the returns or by sending back evidence that their 1040s were correct as originally filed.

I've personally dealt with two correspondence audits. I'm batting 500. The one the IRS got right was the time I overlooked some investment income. Take it from me, double check those 1099s!

You also can find more tips on dealing with IRS questions by mail in today's Daily Tax Tip entitled Don't ignore that IRS letter and nine other tax notice tips.

You also might find these items of interest:

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